One year and a day
The line between short and long term.
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Marginal tax brackets, demystifiedTax credits versus tax deductionsStandard deduction or itemising?Sales tax, explained (and why your receipt total surprises you)Which receipts actually matter at tax timeShort-term and long-term capital gainsTax-loss harvesting, carefullyW-2 employee versus 1099 contractorCharitable giving and taxesWhen to hire a tax professional
Short-term and long-term capital gains
Hold an investment for more than a year and gains are usually taxed at lower long-term rates.
In this lesson you will
- Tell short-term from long-term gains
- Calculate a gain from cost basis
- Know how losses offset gains
A capital gain is the profit when you sell an investment for more than you paid. In a taxable account, how long you held it changes how it is taxed.
Short-term versus long-term
- Short-term: held one year or less — taxed at your ordinary income rates.
- Long-term: held more than one year — taxed at long-term capital gains rates, which are generally lower.
Cost basis
Your cost basis is what you paid, including reinvested dividends. Gain = sale price − cost basis. Keeping records — or letting your broker track them — avoids paying tax twice on reinvested dividends.
Losses offset gains
Capital losses offset capital gains. If losses exceed gains, up to $3,000 a year ($1,500 if married filing separately) can offset ordinary income, and the rest carries forward to future years.
Tax-advantaged accounts
Inside 401(k)s and IRAs, buying and selling does not create yearly capital gains tax. Not tax advice — rules and amounts change; check IRS.gov or a tax professional.
By the GetGuac team · Editorial policy
Three ideas to keep
Basis includes reinvested dividends
Or you pay tax twice.
Retirement accounts avoid yearly gains tax
Trading inside them is not taxed each year.
Do it in 4 steps
Check purchase dates
Before selling.
Confirm cost basis
In your broker statements.
Prefer long-term where sensible
Do not let tax override a plan.
Use losses carefully
They offset gains.
One sale, two holding periods
Bought for $4,000, sold for $6,000. Illustrative rates: ordinary 22%, long-term 15%.
| Held | Gain | Rate | Tax |
|---|---|---|---|
| 11 months (short-term) | $2,000 | 22% | $440 |
| 13 months (long-term) | $2,000 | 15% | $300 |
Waiting two more months saved $140 here — rates depend on your income.
Where this usually goes wrong
- Selling a day before the one-year mark without checking
- Forgetting reinvested dividends in basis
- Letting tax drive every decision
Find the purchase date of one investment in a taxable account and note when it becomes long-term.
Tools and guides for this lesson
Quick quiz
1. Long-term means held…
2. Short-term gains are taxed at…
3. Net capital losses can offset ordinary income up to…
0 of 3 answered
Puzzle
You bought for $2,500, reinvested $300 of dividends, and sold for $3,600. What is the gain?
Show the answer
$800
Basis $2,500 + $300 = $2,800. $3,600 − $2,800 = $800.